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Insight | It’s time we made corporate governance proportionate

07 July 2017

With all eyes on Brexit negotiations, Honorary Professor Guy Jubb reflects on another other challenge facing the UK’s boardrooms – reforming corporate governance.

As the UK Government focuses elsewhere, the business community patiently awaits progress on much needed corporate governance reforms.

Recognising the need for a UK corporate governance framework adapted to the changing environment, the latest recommendations from the House of Commons Business, Energy and Industrial Strategy Committee in April 2017 merit careful consideration.

The UK Government must recognise it is in the best long-term interests of the British public and the British economy to adopt a proportionate risk-based approach to corporate governance, rather than continue with the current one-size-fits-all regime.

Genuine public interest companies – those in regulated industries or major employers – should be subject to regulation commensurate with their public interest risk, irrespective of whether they are publicly or privately owned. While other non-regulated and smaller companies, which do not pose a significant public interest risk, should be subject to a less onerous regime.

It is imperative UK companies are governed in a way that enables entrepreneurial leadership to flourish, rather than being tangled up by increasingly complex codes.

With the Financial Reporting Council expanding its enforcement scope and raises its game, there’s a real risk of strangling innovation as company directors – particularly non-executive directors – start to focus more on code compliance rather than driving their companies forward. If ever there were a need for a balanced and proportionate approach, it is now.

Currently UK Government’s hands are tied, by having to comply with the EC’s definition of a ‘public interest entity’, which embraces all UK listed companies, irrespective of whether or not they carry a risk to the public interest.

However, other implications or discourses around Brexit aside, leaving the European Union creates a reform opportunity policymakers should seize to prepare the way for a two-tier proportionate, risk-based approach to corporate governance once the negotiations are complete.

Tier 1 companies would be those that are genuinely public interest ones, like the banks, insurance companies and major employers. Tier 2 companies would be the others, who would tend to be smaller and more entrepreneurial.

Companies in both Tiers would be expected to comply with common foundation principles of good corporate governance but would be subject to different comply or explain code provisions – more onerous for Tier 1 than Tier 2 – that would reflect the proportionate difference in public interest.

The current system of corporate governance is creaking. Many of the so-called reforms that have been mooted, whilst welcome in principle, are dangerously like a blunt instrument. They could not only clog up Britain’s boardrooms but also have unintended adverse economic consequences.

Changes must be made and the time is now right to prepare the way for a proportionate, risk-based post-Brexit approach to sustain the British economy.

Guy Jubb is an Honorary Professor at University of Edinburgh Business School and the former Global Head of Governance & Stewardship at Standard Life Investments

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